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Principles of Microeconomics

Description of the Examination

The Principles of Microeconomics examination covers material that is usually taught in a one-semester undergraduate course in introductory microeconomics. This aspect of economics deals with the principles of economics that apply to the analysis of the behavior of individual consumers and businesses in the economy. Questions on this exam require candidates to apply analytical techniques to hypothetical as well as real-world situations and to analyze and evaluate economic decisions. Candidates are expected to demonstrate an understanding of how free markets work and allocate resources efficiently. They should understand how individual consumers make economic decisions to maximize utility, and how individual firms make decisions to maximize profits. Candidates must be able to identify the characteristics of the different market structures and analyze the behavior of firms in terms of price and output decisions. They should also be able to evaluate the outcome in each market structure with respect to economic efficiency, identify cases in which private markets fail to allocate resources efficiently, and explain how government intervention fixes or fails to fix the resource allocation problem. It is also important to understand the determination of wages and other input prices in factor markets, and analyze and evaluate the distribution of income.

The examination contains approximately 80 questions to be answered in 90 minutes. Some of these are pretest questions that will not be scored. Any time candidates spend on tutorials and providing personal information is in addition to the actual testing time.

Knowledge and Skills Required

Questions on the Principles of Microeconomics examination require candidates to demonstrate one or more of the following abilities.

  • Understanding of important economic terms and concepts
  • Interpretation and manipulation of economic graphs
  • Interpretation and evaluation of economic data
  • Application of simple economic models

The subject matter of the Principles of Microeconomics examination is drawn from the following topics. The percentages next to the main topics indicate the approximate percentage of exam questions on that topic.

8%–14%
Basic Economic Concepts

  • Scarcity, choice, and opportunity cost
  • Production possibilities curve
  • Comparative advantage, specialization, and trade
  • Economic systems
  • Property rights and the role of incentives
  • Marginal analysis

55%–70%
The Nature and Functions of Product Markets

15%–20% Supply and demand

  • Market equilibrium
  • Determinants of supply and demand
  • Price and quantity controls
  • Elasticity
    • Price, income, and cross-price elasticities of demand
    • Price elasticity of supply
  • Price, income, and cross-price elasticities of demand
  • Price elasticity of supply
  • Consumer surplus, producer surplus, and market efficiency
  • Tax incidence and deadweight loss

5%–10% Theory of consumer choice

  • Total utility and marginal utility
  • Utility maximization: equalizing marginal utility per dollar
  • Individual and market demand curves
  • Income and substitution effects

10%–15% Production and costs

  • Production functions: short and long run
  • Marginal product and diminishing returns
  • Short-run costs
  • Long-run costs and economies of scale
  • Cost minimizing input combination

23%–33% Firm behavior and market structure

  • Profit
    • Accounting versus economic profits
    • Normal profit
    • Profit maximization: MR=MC rule
  • Perfect competition
    • Profit maximization
    • Short-run supply and shut-down decision
    • Firm and market behaviors in short-run and long-run equilibria
    • Efficiency and perfect competition
  • Monopoly
    • Sources of market power
    • Profit maximization
    • Inefficiency of monopoly
    • Price discrimination
  • Oligopoly
    • Interdependence, collusion, and cartels
    • Game theory and strategic behavior
  • Monopolistic competition
    • Product differentiation and role of advertising
    • Profit maximization
    • Short-run and long-run equilibrium
    • Excess capacity and inefficiency

8%–14%
Factor Markets

  • Derived factor demand
  • Marginal revenue product
  • Labor market and firms' hiring of labor
  • Market distribution of income

10%–16%
Market Failure and the Role of Government

Externalities

  • Marginal social benefit and marginal social cost
  • Positive externalities
  • Negative externalities
  • Remedies

Public goods

  • Public versus private goods
  • Provision of public goods

Public policy to promote competition

  • Antitrust policy
  • Regulation

Income distribution

  • Equity
  • Sources of income inequality

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